HIGH HOPES.(US economy)(Brief Article)

When things are going badly, there is a natural tendency to say that they can't get much worse. As the stock market tumbled in recent weeks, Federal Reserve Chairman Alan Greenspan, President Bush, and many others succumbed to that tendency. Greenspan, while avoiding direct comment on the market's gyrations, assured Congress that a healthy economic recovery was under way. The President, while conceding that "you're talking to the wrong guy about what stocks to buy," told reporters that "the future's going to be bright" and that, eventually, "you'll see the market go back up."

Last Wednesday, two days after President Bush made these remarks, the Dow shot up almost five hundred points and closed well above 8,000. He must have been mightily relieved. Since he entered the Oval Office, the Dow has fallen some twenty-five per cent, the S. & P. 500 has slipped even further, and the Nasdaq has dropped by more than half. As Floyd Norris noted in the Times, not even Herbert Hoover, who also predicted bright times ahead, had such a dismal economic start to his Presidency.

Last week's rally--the biggest one-day percentage gain since 1987--was partly the result of what is known on Wall Street as a "short squeeze." In recent months, many professional speculators have been selling stocks they don't own and then buying them back after the prices fell, pocketing the difference. When the market turned up, the "shorts," faced with heavy losses, rushed to buy back the stocks they had sold, and this added to the demand from bargain hunters. The sight of Congress finally taking some meaningful action to reform corporate accounting also helped the rally, as did rumors that the Fed was considering another interest-rate cut.

All the same, it is probably too early to declare an end to the bear market, which began more than two years ago, in April, 2000, with the bursting of the Internet bubble. Since then, it has gradually extended outward, taking down one sector after another with almost clinical precision: dot coms, technology, telecommunications, media, pharmaceuticals, retailers, financials. Even now, stocks are far from cheap--a point that Kenneth Dam, the Deputy Secretary of the Treasury, acknowledged in a surprising moment of candor. At last week's lows, stocks in the S. & P. 500 index were selling for about twenty-two times their earnings per share over the past twelve months. Going back to 1870, stocks have traded, on average, at about fourteen times earnings. It's true that some firms' profits are unusually low because of the recent recession, but there is still no indication of a sustained recovery in corporate earnings. Indeed, there is a serious threat of a relapse.

Since the spring of 2000, about seven trillion dollars of stock-market wealth has vanished--about seven hundred ...